Question

On January 1, 2017, Clayton Company issues $640,000, 15 year, 8% bonds (paying semiannual interest on 6/30 and 12/31) for $765,443, when the annual market rate of interest is 6%. If the company uses the effective interest method of amortization, what will be the amount of interest expense recorded on the December 31, 2017 Income Statement? (HINT: Will include the total interest expense recorded with both the June 30 payment and the December 31 payment).

Answer 1

Clayton Company

The amount of interest expense recorded on the December 31, 2017 Income Statement is:

= $45,847

Step-by-step explanation:

a) Data and Calculations:

Face value of bonds = $640,000

Issue price = $765,433

Premium on bonds = $125,433

Bonds maturity period = 15 years

Interest rate on the bonds = 8%

Annual market rate of interest = 6%

Interest expense for the first year:

June 30, 2017:

Amount of semi-annual interest payment = $25,600 ($640,000 * 4%)

Semi-annual Interest expense = $22,963 ($765,433 * 3%)

Amortization of bonds premium = $2,637

Carrying value of bonds on June 30, 2017 = $762,796 ($765,433 - $2,637)

December 31, 2017:

Amount of semi-annual interest payment = $25,600 ($640,000 * 4%)

Semi-annual Interest expense = $22,884 ($762,796 * 3%)

Amortization of bonds premium = $2,716

Carrying value of bonds on December 31, 2017 = $760,080 ($762,796 - $2,716)

Total interest expense for the year:

June 30, 2017: Semi-annual Interest expense = $22,963

December 31: Semi-annual Interest expense = $22,884

Total interest to be recorded on 12/31/2017 = $45,847